Tips For Purchasing A Home With Huge Student Loan Debt
Recent years have seen a perfect storm of ever-rising tuition rates and weak employment, leaving many recent grads saddled with thousands of dollars in student debt and with no job in sight.
50% of student loan borrowers who say their debt affects whether or not they’ll pursue homeownership, according to a 2015 survey by American Student Assistance, a Boston-based nonprofit.
“I’d say student loan debt is probably the biggest concern people have about getting qualified,” says Dan O’Brien, a Realtor® in Indianapolis, IN. “I’ve had many buyers tell me they want to buy a house but they have a ton of student debt and don’t think they make enough to qualify because of it.”
So should you just give up on buying a home until that far-off day when you’ve paid back all your loans? Not necessarily. Let me give you some (free!) education about what I’ve learned in exploring my options for homeownership—debt and all.
Get your student loan payment plan in order
I started calling lenders shortly after I graduated. Do you want to absolutely kill a conversation with a mortgage lender? Tell them you’re not paying anything on your student loans right now and you don’t know how much you’ll be able to pay in the future. Hello? Hello?
I didn’t realize it at the time, but I was looking to purchase a home during the absolute worst point in a student loan repayment plan—the six-month grace period after graduation. I hadn’t paid anything back yet, or set up an income-based repayment plan. I just had many thousands of dollars in debt hovering over me, scaring off potential lenders.
“It used to be that certain programs would show you were in deferment [to put off paying your debt], and the underwriter would overlook that,” says Travis Cartmel, a branch manager at mortgage company AnnieMac in Indianapolis. This is known as The Good Old Days.
But under current guidelines, even if you’ve deferred your loan repayment, mortgage lenders will still factor in the amount you owe. And they could deny you because of it—no matter how good your credit score is.
So don’t do what I did. Instead, try the following:
- Wait until the six-month grace period has passed
- Consolidate your student loans before looking for a mortgage
- Calculate what kind of mortgage you could afford on top of your student loans
- Set up an income-based repayment plan, or at least a plan that won’t eat up a huge chunk of your income
While you’re waiting, get all your bills in order
The grace period can be the perfect time to work on paying down credit cards and other bills.
When you apply for a home loan, lenders put a lot of emphasis on your monthly debt-to-income ratio. This must be below 43% to qualify for most mortgages, although keeping it below 36% is ideal to make sure you can keep up with all your monthly bills—and to get the best terms on a loan.
Even if you have a boatful of student loan debt, paying down other bills can significantly lower that debt-to-income ratio. And that’ll also have the bonus effect of improving your credit score, making you all the more attractive (or at least viable) to lenders.
Find a co-borrower, or save up for a hefty down payment
If you have someone else who can make your finances look better on paper, by all means take advantage of it.
Me? I’m not so lucky. My girlfriend’s salary as a medical assistant sadly does not qualify her as a “sugar mama.” And although my actual mom was willing to put money toward a down payment, she didn’t want to co-sign a mortgage. Continue reading > > >
via Realtor | Lead image: YinYang/iStock; Feverpitched/iStock